Monday, April 30, 2018

The Job Guarantee Controversy

With Senator Bernie Sanders in the forefront, some Democratic members of Congress are planning a bill to guarantee jobs that pay $15 per hour, not including mandatory benefits packages, for all Americans. Legislative details have not yet been announced (!), but several sets of plan have been published recently, including on the website of the Sanders Institute, which was founded by Jane O'Meara Sanders, wife of the senator. Here, let's run through a couple of the more prominent plans, and then list on criticisms that have been bubbling up--with a focus on critiques from writers typically identified as being on the political left.

The Sanders Institute has recently blogged about a report called "Public Service Employoment: A Path to Full Employment," by L. Randall Wray, Flavia Dantas, Scott Fullwiler, Pavlina R. Tcherneva, and Stephanie A. Kelton, published in April 2018 by the Levy Economics Institute of Bard College.
"We propose the creation of a Public Service Employment (PSE) program that would offer a job at a living wage to all who are ready and willing to work. This is a “job guarantee” program that provides employment to all who need work by drawing from the pool of the otherwise unemployed during recessions and shrinking as private sector employment recovers. Federally funded but with a decentralized administration, the PSE program would pay $15 per hour for both full- and part-time positions and offer benefits that include health insurance and childcare ..."
The paper presents a model to estimate what the US labor market would have looked like in late 2017 with such a program in place. The estimate is that about 15 million workers would be receiving public service employment jobs  through the program. In addition, the report argues that the buying power of those workers would create an economic boom such that the the number of jobs in the private sector would expand by 4 million.

For comparison, the US economy has about 6.5 million unemployed workers at present. Thus, the forecast involves about 12.5 million adults who are currently "out of the labor force" and no longer looking for jobs who would re-enter the labor force.

Estimated cost to the federal government of the jobs would run $400-$500 billion, but the government would also have higher tax revenues (from more workers) and a savings of perhaps a couple of hundred billion from less spending on anti-poverty programs and Medicaid. The report states: "[T]he PSE program would lower spending by all levels of government, as well as by businesses and households, on a range of costly problems created by unemployment. It is possible that the program would “pay for itself” in terms of savings due to reduced crime, improved health, greater social and economic stability, and larger reductions in Medicaid and EITC expenditures than those assumed in the simulations ..."

The report only sketches how such a plan would be implemented, but the broad is that it would be federally funded and locally administered, with local and state agencies seeking out the job opportunities. The public service employment jobs would be focused on jobs in three areas:

Environment: "The jobs will tackle: soil erosion; flood control; environmental surveys; species monitoring; park maintenance and renewal; removal of invasive species; sustainable agriculture practices to address the “food desert” problem in the United States; support for local fisheries; Community Supported Agriculture (CSAs); community and rooftop gardens; tree planting; fire and other disaster prevention measures; weatherization of homes; and composting."

Community: "Jobs can include: cleaning up vacant properties, reclaiming materials, restoration, and other small infrastructure investments; setting up school gardens, urban farms, co-working spaces, solar arrays, tool libraries, classes and programs, community theaters, and oral history projects; building playgrounds, pedestrian areas, and bike lanes; and organizing carpooling, recycling, reuse, and waste collection programs."

Care for people: "Projects would include elder care, afterschool programs, and special programs for children, new mothers, at-risk youths, veterans, former inmates, and people with disabilities. One advantage of the PSE program is that it also provides job opportunities to people from these groups who are seeking work. In other words, the program gives them agency. For example, the at-risk youths themselves would participate in the execution of the after-school activities that aim to benefit them; veterans can work for and benefit from different veteran outreach programs. Such jobs can include: organizing afterschool activities in schools or local libraries; facilitating extended day programs; shadowing teachers, coaches, hospice workers, and librarians to learn new skills and assist them in their duties; organizing nutrition surveys in schools and health awareness programs for young mothers. The PSE program will also organize urban campuses, co-ops, afterschool programs, adult skill classes, apprenticeships in sustainable agriculture, and all of the above-mentioned community care jobs, training a new generation of urban teachers, artists and artisans, makers, and inventors."

A broadly similar but distinct-in-the-details approach to a federal job guarantee program is laid out by Mark Paul, William Darity, Jr. , and Darrick Hamilton in "The Federal Job Guarantee—A Policy to Achieve Permanent Full Employment, " written for the Center on Budget and Policy Priorities (March 9, 2018). The same set of authors, plus Khaing Zaw, have also written "A Path to Ending Poverty by Way of Ending Unemployment: A Federal Job Guarantee," which appeared in the  February 2018 issue of the Russell Sage Foundation Journal of the Social Sciences (4:3, 44–63).  Here's some information on the idea from the CBBP paper:
"The permanent establishment of a National Investment Employment Corps (NIEC). The NIEC will provide universal job coverage for all adult Americans. ... The federal job guarantee would provide a job at a minimum annual wage of $24,600 for full-time workers (poverty line for a family of four) and a minimum hourly wage of $11.83. Workers would have the opportunity to advance within the program, rising from the minimum wage in the program to an estimated mean salary of $32,500. The wage would be indexed to the inflation rate to ensure that the purchasing power of enrollees is maintained and the wage will vary to allow for some degree of regional variation. ... To provide a true non-poverty wage and meet the fundamental rights of American citizens, the policy will include health insurance for all full-time workers in the program. The health insurance program should be comparable to that offered to all civil servants and elected federal officials. In addition, the NIEC would offer benefits such as retirement plans, paid family and sick leave, and one week of paid vacation per three months worked. ..." 
"The NIEC can be deployed to cover a wide scope of activities including, but not limited to, the repair, maintenance, and expansion of the nation's infrastructure, housing stock, and public buildings; energy efficiency upgrades to public and private buildings; assistance with ecological restoration and services to reduce the country’s carbon footprint; engagement in community development projects; provision of high-quality preschool and afterschool services; provision of teachers’ aids; provision of high-quality elder care and companionship; rejuvenation of the nation’s defunded postal service; support for the arts; and other activities that shall support the public good."
For January January 2018, the estimated total cost to the federal government of the jobs would be $543 billion, which again could be offset to some extent by lower government payments on existing programs for those with low incomes.

I've described these job guarantee proposals in neutral terms. I do think the US job market needs a genuine shake-up along a number of dimensions, which I'll briefly sketch at the end of this post. I give the authors of such plans full credit for  being willing to attach their names to some big proposals. But ultimately, I'm not not a fan of federal job guarantee schemes. Here are some of the concerns.

If a central government job guarantee is such a great idea, then why wasn't it already done in social democratic countries of Europe long ago? 

When a very large-scale proposal hasn't been used by those who might seem sympathetic to it, it seems wise to be suspicious of its merits. Here's Kevin Drum at Mother Jones magazine:

"This is why even our lefty comrades in social democratic Europe don’t guarantee jobs for everyone. It would cost a fortune; it would massively disrupt the private labor market; it would almost certainly tank productivity; and it’s unlikely in the extreme that the millions of workers in this program could ever be made fully competent at their jobs."
The government managerial problem

The sheer scope of the managerial challenge is breathtaking. Here's a comment from Josh Bivins from the Economic Policy Institute in  "How do our job creation recommendations stack up against a job guarantee?" (April 12, 2018):
"I don’t think we have the public sector managerial capacity right now to oversee the work of 11 million people—who will be coming from varying backgrounds and labor qualifications—and ensure that they will be perceived as undertaking socially useful tasks. This is essentially three times as many people as there are K-12 public school teachers in this country today. These 11 million workers will not have a shared mission (like school teachers) or overwhelmingly have advanced education (again, like teachers). We will need to slot them into a system of management and oversight that has yet to be created or defined (unlike public education, where at least the goals and population to be served are clear enough). Further, if the private sector contracts in a recession, this number could swell within 18 months to 22 million. This would require careful management of a workforce more than 10 times as large as Wal-Mart’s global labor force. Building anything like this much public sector management capacity strikes me as a project that will be years, if not decades, in the making. And attempts to do this all at once will lead inevitably, I think, to stories about how these are disorganized make-work programs and the stigma will follow." 
The job skills mismatch problem

Many jobs in the modern US economy require some level of skill background. For example, construction and buildings are not done by inexperienced workers wielding shovels. The idea that workers will walk in off the street, guaranteed a job, and then sent off to look after the elderly, after-school programs, or pre-schoolers rubs me the wrong way. Bivins puts the point this way: 
"Darity and Hamilton have recently written very convincingly about the need to professionalize the care sector. We couldn’t agree more. But we think it’s precisely this need to make these professionalized, career-building jobs that make them an uneasy fit for a job guarantee. We certainly don’t want child care workers leaving these jobs as soon as demand in the private sector ramps up hiring and offers higher wages. And during times when the private sector contracts, I don’t think we can easily absorb people from a range of professional backgrounds seamlessly into early child care and education jobs. We certainly don’t think we can slide people easily into becoming K-12 teachers during downturns, and professionalizing early childhood care and education means treating this workforce much more like K-12 teachers than they are today. One could argue this is less true for, say, jobs related to physical infrastructure investment, but, I’m not sure I believe it. Most civil construction jobs these days are skilled enough (or dangerous enough or incur enough legal liability) that it’s not obvious to me that lots of people from varying professional backgrounds could just be slotted into them seamlessly during private sector contractions."
The geographical mismatch problem

These federal job guarantee plans do not anticipate that workers will need to relocate to get these jobs: instead, the jobs will need to be created not too far from the existing workers. In large coastal cities, a wage of $15/hour may not seem all that high. But think about a giant swath of the country starting in the upper midwest in parts of Michigan, Ohio, and upstate New York, then spreading down the south and across to the southwest and the Rocky Mountain states. That area includes plenty of rural counties and small-to-medium cities where a wage rate of $15/hour, plus benefits, would be a dramatic shock to the local economy.

In certain concentrated higher-poverty areas, the federal job guarantee will be easily the best job on offer.  Many of the existing local employers in those areas will be unable to match such wages, at least for a substantial share of their workforce. The disruption to the existing private employers from this kind of proposal will not be equally distributed.

The current worker displacement problem

One advantage claimed for these proposals is that it will force the private sector to raise wages and benefits to match the government guaranteed jobs. Some employers may do this. But my guess is that lots of employers would undertake a two-part strategy. The first part would be to figure out how to use training and additional equipment so that it made sense to give some workers a pay raise. The second part would be to fire all the other workers. Advocates of a federal job guarantee may want to consider that in a future of guaranteed jobs, it would have a lot less political weight to protest that an employer is laying people off. It would have a lot less weight to protest that companies have a social responsibility to hire. Such protests lose a lot of their kick if all workers are now guaranteed an alternative job. 

The unanswered unionization question 

It's interesting to me that the proposals above contain almost no mention of union workers. I'm not sure what the rationale is here. One possible hidden assumption is that none of the jobs suggested here will be in competition with any existing or potential unionized jobs. But this interpretation seem naive, and none of these authors fall into that category. Ir's possible that rather than stir up possible opposition from unions, these authors are choosing to lie low on this issue.

Another possible hidden assumption is that workers in the Public Service Employment jobs or the National Investment Employment Corps would be unionized. After all, government employees are now one of the heavily unionized sectors of the US economy, and this plan could thus potentially add millions of workers to their ranks.

The problem of workforce incentives and discipline

The problem with a job "guarantee" is that you can't fire people. Let me stipulate that most of the people who show up for a federal jobs program do have some desire to work. But locally run programs do tend to develop a certain internal momentum. If tough-minded administrators are wiling to commit the time and energy to hold workers accountable, one outcome can emerge. If in some areas the administrators just hand out the check, a different outcome will emerge. Again, the word "guarantee" means that if can make a plausible claim to have showed up at a certain worksite for a certain time, you get paid.

What happens to the existing anti-poverty programs? 

The working assumption in these proposal seems to be that with a federal job guarantee in place, all the existing anti-poverty programs will stay in place--although they won't be needed as much. If there is a federal job guarantee, then there will be enormous political pressure to cut these programs. My suspicion is that what these authors envision as an option to take a federally guaranteed job will vert quickly turn into a legal requirement to take such a job.

The budgetary costs are large and real

The proponents these programs are estimating costs in the hundreds of billions of dollar, and proponents for any plan often have a tendency toward overoptimism. That's a lot. (Let's gently dismiss the bits of rhetoric here and there about how these programs would pay for themselves with other cost savings, as a sort of left-wing supply-side wish-fulfillment.)  Indeed, anyone who was arguing that the US government could not afford the Trump tax cut, which in round numbers was about $100 billion per years, seems to me required by basic intellectual consistency to say that a federal job guarantee is unaffordable, too. (Of course, it would be logically consistent to argue that the Trump tax cut was affordable, but a bad idea for other reasons.)

What's the ideal for how a job market should work? 

A growing and healthy economy will be in a continual process of evolution and adjustment. We want the labor market to be part of that adjustment. We want people to move to continually acquire new skills, which can mostly happen within existing jobs, but sometimes needs to happen between jobs. We want some people to move to new areas, either across their metro area or sometimes to new state.

The government has several important roles to play in this vision of a labor market. At the big-picture macroeconomic level it has some responsibility for using fiscal policy, monetary policy, and financial regulation to reduce the risk of recessions and to soften the blow of recessions when they arise. At a smaller-picture level, it has an important roles to play in providing support for education, worker training, as well as in providing safety net

I think the US government should do considerably more in the US labor market than it does. The US tends to focus on "passive labor market policies," like paying unemployment benefits, while doing much less than it should on "active labor market" policies with a combination of job search assistance training, and subsidized public sector employment. For prior discussions of some of these topics, see these posts (and the reports and articles mentioned in them):

Ultimately, it feels to me as if proposals for a federal job guarantee proposal are a cry of despair, erupting from an exhausted patience. To me, the underlying message is: "Stop being distracted by small-scale arguments and day-to-day political compromises, drop the cautious incrementalism, and pay the money to help those who want to work. Stop quibbling, and just make it happen!" Righteous exasperation always has a rhetorical appeal. But the real world is full of costs and tradeoffs, and if the US political system wants to make some dramatic moves to help US workers, considerably better options than a federal job guarantee are available.

Saturday, April 28, 2018

Economics: Reviled Because It Matters

Marion Foucade is one of the most thoughtful and incisive interpreter/critics of the interaction between academic economics, other disciplines, and the real world. She delivered a keynote address at the 2017 meetings of the Swiss Society of Economics and Statistics. Her talk, "Economics: the view from below," is available in the Swiss Journal of Economics and Statistics (2018, 154:5) or you can watch video of the presentation here. Here, I'll quote some snippets that struck me in particular, but the entire lecture is recommended.
"In the course of the twentieth century, economists have been able to establish a remarkable position for themselves, as experts in local and national governmental organizations, in independent agencies and central banks, in international institutions, in business and finance, and in the media. They supplanted lawyers in government and historians in the public sphere. As such, they have been involved with some of the most consequential decisions that societies make—decisions having to do, for instance, with the level of unemployment that might be left unattended, because it should be considered “natural”; with whether or not to authorize the purchase and sale of untested financial products or with how to organize the delivery of clean water, vaccines or electricity. This involvement has come at a cost. As Robert Chernomas and Ian Hudson put it, “economics has the awkward distinction of being both the most influential and the most reviled social science” (2016, 3). We might add: economics may be the most reviled social science precisely because it is the most influential. ...
"Where does this belief and the authority of economics come from? Here, it is useful—perhaps—to consider the origin conditions of modern economic discourse. ... By knowing the natural laws of the market, political economy offered a way to tell the truth about the correct limits of governmental practice. Government action was not to be judged primarily in terms of legitimacy or justice, but in terms of whether it was right or wrong. And it is the market that was to provide that truth-test, through the work and voice of political economists. ... Economists, consequently, have become the guardians and the revelators of this truth, not simply in their own eyes, of course, but in the eyes of everyone, and first and foremost in the eyes of government itself. ... 
"Unlike the other social scientific disciplines, economics comes with a promise: the promise to make money, the promise to save money, the promise to allocate money (a rare resource) in the most efficient manner. In other words, part of the authority of economists also comes from their association with whoever holds the purse strings. They navigate the most powerful parts of the world, where financial decisions are being made and where political and corporate leaders are being trained. And, I shall add, this association has become increasingly tight over the course of the twentieth century. Business schools, for instance, have gone from being intellectual backwaters staffed with practitioners to becoming scientific powerhouses filled with disciplinary social scientists (with economics PhDs being the largest group) (Fourcade and Khurana 2013).
"The consequences of this prosperous social position are not trivial. Let us remember that money is not neutral (Frey 1997). It changes people from within. As their jurisdiction has expanded and diversified, economists as a group have seen their financial fortunes multiply. This is especially striking in the USA, where economics is one of the most lucrative degrees over a person’s lifecycle, both at the undergraduate and graduate levels (Weissmann 2014).The salaries of academic economists have grown faster than any other arts and sciences discipline, including “hot” subjects like computer science, over the last 30 years, and opportunities for extra-academic income have proliferated. ...
"These thoughts, which expose the fundamentally contingent and heteronomous nature of economic knowledge, are sobering, perhaps. Paradoxically, I do not think that they necessarily bode ill for the discipline. First, we should recognize that what Michael Reay (2012) calls the “flexible unity” of economics is a fundamental component of its strength. On the one hand is a fairly united “way of looking at the world” (Coase 1978, 210) and an eminently recognizable style of reasoning, which is applicable across a broad range of domains: in that sense, economics is a truly generalistic form of expertise, defined by its techniques and epistemological processes rather than by its core beliefs about the way the world works. In fact, what we call the mainstream has been malleable enough to incorporate waves of peripheral (and once rejected) ideas and concepts (think: price rigidities into real business cycle models, increasing returns into growth theory, non-rational behavior). As a result, the core has become multiple and fragmented, but it can still legitimately claim to hold up through, rather than against, this fragmentation. As French regulationist economist Robert Boyer (2016) has recently suggested, this is a paradoxical world in which the respective “truths” of Eugene Fama and Robert Shiller can both legitimately exist, and where the very multi-vocality of the field is actually the mechanism that fosters its resilience.
Want more Fourcade? One starting point is her article "The Superiority of Economists," co-authored with Etienne Ollion and Yann Algan, in the Winter 2015 issue of the Journal of Economic Perspectives (where I work as Managing Editor). A taste from the abstract: 
"Taken together, these traits constitute what we call the superiority of economists, where economists' objective supremacy is intimately linked with their subjective sense of authority and entitlement. While this superiority has certainly fueled economists' practical involvement and their considerable influence over the economy, it has also exposed them more to conflicts of interests, political critique, even derision."

Thursday, April 26, 2018

Venting about the Helium Market

The US Department of the Interior has identified a list of 35 "critical minerals," which is "a mineral identified to be a non-fuel mineral or mineral material essential to the economic and national security of the United States, the supply chain of which is vulnerable to disruption, and that serves an essential function in the manufacturing of a product, the absence of which would have significant consequences for the economy or national security."

I'm constitutionally skeptical of such lists. It often seems that when supplies of a "critical" mineral decline and price rises, there is a short-term spike in articles talking about a "crisis." But then the  market responds to the higher price with a mixture of finding new sources, increased recycling, or finding ways to substitute for that mineral in a substantial number of uses. Life goes on. As one example, here's my write-up of "The Rare Earths Shortage: A Crisis with a Supply and Demand Answer" (March 10, 2015). Yes, rare earths remain on this "critical minerals" list. Another entry on the critical minerals list is aluminum, and I have previously discussed "The National Security Argument for Steel and Aluminum Tariffs" (March 7, 2018). 

I can't claim to have looked at all 35 items on the critical minerals list, but one that does perplex me is the quite peculiar market for helium. Stephen T. Anderson lays out the background in "Economics, Helium, and the U.S. Federal Helium Reserve:Summary and Outlook," which appears in Natural Resources Research (December 5, 2017). Here is his quick summary of the peculiarities of the helium market from the abstract:
"In 2017, disruptions in the global supply of helium reminded consumers, distributors, and policy makers that the global helium supply chain lacks flexibility, and that attempts to increase production from the U.S. Federal Helium Reserve (the FHR) may not be able to compensate for the loss of one of the few major producers in the world. Issues with U.S. and global markets for helium include inelastic demand, economic availability of helium only as a byproduct, only 4–5 major producers, helium's propensity to escape earth's crust, an ongoing absence of storage facilities comparable to the FHR, and a lack of consequences for the venting of helium. The complex combination of these economic, physical, and regulatory issues is unique to helium, and determining helium's practical availability goes far beyond estimating the technically accessible volume of underground resources."
These issues are not new. Back in 2008, for example, Science Daily was reporting "Helium Supplies Endangered, Threatening Science And Technology" (January 5, 2008). In 2010, Nobel prize-winner in physics Robert Richardson, who shared the prize "for their discovery of superfluidity in helium-3," was giving speeches which ran under headlines like "The world is running out of helium: Nobel prize winner," (, August 24, 2010)

In 2012, William J. Nuttall, Richard H. Clarke and Bartek A. Glowacki were discussing the problem in Nature magazine ("Resources: Stop squandering helium," (May 31, 2012, pp. 573-575). Helium is trapped in certain (not all) natural gas fields, but natural gas is a $1 trillion per year industry and helium is a $1 billion per year industry. As a result, natural gas producers often ignore helium and let it vent away as a waste product. Once the helium is in the atmosphere, it isn't recoverable at reasonable cost.

They point out that, for a time, the US government was a main producer and consumer of helium. In the 1920s, the government designated a natural underground dome near Amarillo, Texas, as the site for a helium reserve. Starting in the 1960s, the US government greatly expanded the reserve. It provided some additional certainty in the market: helium producers knew that they had a place to sell, and helium consumers knew they had a place to buy. Nuttall, Clarke, and Glowacki provide this chart showing how helium production ramped up in the 1960s to fill the reserve. They also show in recwent years that the reserve is being drawn down in the aftermath of a 1996 law, which is why shipments have exceeded production in the last couple of decades. They argue that it is time for an international helium reserve.

In July 2015, Wired magazine was pointing out that helium prices have been rising since 2000, and it was all the government's fault for trying to sell off and privatize the helium reserve (The Feds Created a Helium Problem That's Screwing Science," by Sarah Zhang, July 15, 2015). However, less than a year later in July 2016, Wired was reporting "That Dire Helium Shortage? Vastly Inflated" (by Brendan Cole, June 29, 2016). Partly, this was because of a discovery of huge helium deposits in an area of Tanzania. In addition, the point is made that when helium prices rise, places where natural gas production is relatively rich in helium--like Qatar--will have an incentive to extract it. 

Which sounded OK until July 2017, when as Steven Anderson note: "On June 5, 2017, neighboring countries initiated a trade embargo of Qatar, which had accounted for approximately 32% of the global helium supply prior to the blockade ..." Overall, as Anderson notes: 
"Helium is an exhaustible natural resource for which there are limited or no substitutes including for its use as a coolant in military aircraft, certain types of nuclear reactors; the manufacture of optical fiber and semiconductors; providing low enough temperatures for superconducting magnets; enabling modern magnetic resonance imaging (MRI) technologies to operate; other cryogenic applications; and in other applications (Cai et al. 2012). Because of its unique properties, helium is expected to continue to be essential in
enabling the development of such critical technologies in the future ...
"The American Physical Society and Materials Research Society (2011) recommended that the United States should maintain a nondefense stockpile of helium, but not of any of the 13 other energy critical elements (ECEs) that they identified. They suggested that helium is unique even in comparison with other ECEs, because it is unlikely that any economic source of helium besides natural gas will be found, helium is often vented into the atmosphere during the production and consumption of natural gas, and natural gas production (without separation of helium) and consumption is likely to continue to increase. Since then, natural gas production and consumption in the country has increased, but that has been mostly owing to increases in the production of shale gas, which may not have any significant helium content."
 At present, US policy under the Helium Stewardship Act of 2013 is to sell the reserves, but as Anderson reviews the limited academic research, it's clear that helium policy is on shaky ground. For example, it might make sense to allow the helium reserve to be privatized as a profit-making facility. It might make sense for the US government to hold a larger reserve. If it's really difficult to find substitutes for helium, which seems possible, and if there cold be important and as-yet-discovered uses for helium in the future, we might wish to encourage natural gas producers to produce and save helium now, rather than being so quick to vent it into the air. The very limited number of US producers, and the fact that some of the main international producers are in not-always-reliable places like Russia and Qatar, complicates the issue. Orr perhaps we need to push research on finding cost-effective ways to extracting helium from the atmosphere, as a backstop if helium prices rise dramatically.

As Anderson notes, helium is a peculiar market where concentrated economic analysis might bring real insights. As the King says repeatedly in the old Rogers and Hammerstein musical, "The King and I": "It's a puzzlement."

Follow-up: Tim Worstall offers a useful perspective on how the rise of liquid natural gas production could be intertwined with the production of more helium.

Wednesday, April 25, 2018

Inequality in US Life Expectancy

Here's a topic for lunch-table, hallway, and water-cooler conversation: How much would you be willing to pay, in actual money, for an additional 30 years of life expectancy?

The question is hypothetical, but linked in reality. During the 20th century, life expectancy for an American increased by about 30 years. What are those extra 30 years of life worth? Some years back, Kevin Murphy and Robert H. Topel took a swing at t this subject in "The Value of Health and Longevity" (Journal of Political Economy, Vol. 114, pp. 871-904, October 2006). Obviously, you need to make some estimates about how people value of years of life, but their conclusion that the extra 30 yeas are worth $1 million or more per person seems plausible.

But if gains in life expectancy have considerable value, it also follows that inequality of life expectancy matters, too. Victor R. Fuchs and Karen Eggleston offer a primer on "Life Expectancy and Inequality in Life Expectancy in the United States" in a "Policy Brief" from the Stanford Institute of Economic Research (April 2018). As background, here's a figure showing the what share of people died at what age in 1950 and in 2015.  The increase in life expectancy means that the average age of death has risen.

Fuchs and Eggleston are especially focused on the inequality of life expectancy. So they look at where the age of death falls for the 20th and the 80 percentile of this distribution. Then they calculate how the age of death at these percentiles has evolved over time. It's a little tricky to eyeball this result from the graph (and the authors provide more specific statistical meaures), but the inequality from 80th to 20th percentile diminished somewhat between about 1950 and 2000, but since then the degree of inequality hasn't changed much.

They argue that one way to focus public health policy would be to look at causes of death for the 20th percentile group, and especially for children in that group. They point out that current public health research is heavily focused on heart disease and cancer--which tend to be diseases of the middle-aged and elderly. They suggest some reallocation of resources to "reducing the incidence of low birth weight (e.g., promoting immunization for influenza among women of child-bearing age, especially poor and vulnerable women); assuring access to preventive and curative health services for all children (e.g., through CHIP and Medicaid); and addressing the multiple socioeconomic disadvantages that accumulate over time for poor and minority children, such as poor nutrition, exposure to pollution, and substandard housing." They also note: "Comparison with other high- income democracies indicates great potential in the United States for such an increase. For example, A20 in the United States is 69 years; in Sweden it is 74 years. The U.S. has the lowest A20 of any OECD country except for a few former Soviet republics."

For those interested in more on growth of life expectancy and inequality in life expectancy, here are a couple of useful starting points from the Journal of Economic Perspectives, where I labor in the fields as Managing Editor:

In the Spring 2016 issue, Janet Currie and Hannes Schwandt wrote "Mortality Inequality: The Good News from a County-Level Approach." They argue that to understand shifts in inequality of life expectancy in the last 30 years or so, one needs to draw distinctions by age group. From their abstract:
"Focusing on groups of counties ranked by their poverty rates, we show that gains in life expectancy at birth have actually been relatively equally distributed between rich and poor areas.... Turning to an analysis of age-specific mortality rates, we show that among adults age 50 and over, mortality has declined more quickly in richer areas than in poorer ones, resulting in increased inequality in mortality. This finding is consistent with previous research on the subject. However, among children, mortality has been falling more quickly in poorer areas with the result that inequality in mortality has fallen substantially over time. We also show that there have been stunning declines in mortality rates for African Americans between 1990 and 2010, especially for black men. Finally we offer some hypotheses about causes for the results we see, including a discussion of differential smoking patterns by age and socioeconomic status."
In the Summer 2012 issue, the team of Karen N. Eggleston and Victor R. Fuchs contributed "The New Demographic Transition: Most Gains in Life Expectancy Now Realized Late in Life."  The title tells the theme, but for a bit of detail: "The share of increases in life expectancy realized after age 65 was only about 20 percent at the beginning of the 20th century for the United States and 16 other countries at comparable stages of development; but that share was close to 80 percent by the dawn of the 21st century ..."

Monday, April 23, 2018

The Challenges of Measuring Discrimination Against LGBTI Individuals

It seems quite clear (at least to me) that there is often discriminatory feeling against lesbians, gay men, bisexuals, transgender and intersex people. One can also observe a range of survey evidence and outcomes for people in these categories in terms of family life (including marriage and parenthood), education, health, and economic outcomes. But for economists, at least, drawing a firm connection from discrimination to outcomes can be tough. Marie-Anne Valfort has written "LGBTI in OECD Countries: A Review," which appears in the OECD Social, Employment and Migration Working Papers No. 198  (June 22, 2017).

The lengthy report pulls together a considerable body of evidence that exists on the topic, and is also clear-eyed and thoughtful about the analytical difficulties that arise in this area. Here, I'll sidestep her discussion of family life, education, and health issues, and focus on economic outcomes.

One problem in this area limitations on data.  In survey data, for example, people give dramatically different answers to whether they identify as LGB, whether they have participated in same-sex sexual behavior, or whether they have sometimes felt a same-sex attraction. If it is hard to define a group, then coming up with summary statistics to characterize outcomes for that group will be difficult. And carrying out studies that seek to isolate the effects of discrimination will be difficult, too.

After reviewing the evidence for the US, where the data is better than in many places, Valfort offers this summary (references to later sections of the paper are omitted from the quotation:
"Tentative but conservative measures suggest that LGBTI stand for a sizeable minority. They represent approximately 4.5% of the total population in the US, a proportion that can be broken down as follows among LGBTI subgroups (bearing in mind that these subgroups partly overlap): 3.5% for lesbians, gay men and bisexuals if one relies on sexual self-identification known to yield lower estimates than sexual behaviour or attraction, 0.6% for transgender people and 1.1% for intersex people."
As Valfont summarizes, there have been three broad ways to look at the extent to which differences across groups are due to discrimination. One approach looks at "observational" data, and tries to adjust for factors that seem likely to matter. For example, one could look at income for people, making a statistical adjustment for levels of education, job experience, age, occupation type, and so on. If there is a wage gap remaining after taking these other factors into account, then there is at least some reason to suspect that discrimination might be an issue. However, drawing firm conclusions from such studies is difficult, for a number of reasons that Valfont describes:

-- It seems likely that LGBTI people are likely to move to places where social acceptance of their group is greater and discrimination is less. "Failing to control for this geographic sorting could therefore lead to conclude that LGBT people do not face discrimination while they actually do, an error better known as the “omitted variables bias”.  The underlying problem is that factors not observed in the data can make a difference.

-- Data is weak, and "disclosure of sexual orientation, gender identity or intersex status of LGBTI to their social environment is not a given." It is possible, as Valfont writes: In other words, only the most successful gay men and lesbians (those suffering the least from discrimination) may disclose their sexual orientation to the interviewer."

-- Valfont points out that a number of studies measure the  LGBTI population indirectly, based on surveys where people say they are living with a same-sex partner. " Put differently, most population-based surveys only allow for identifying partnered homosexuals and comparing how they fare relative to their heterosexual counterparts ...  that is surely not representative of the LGBTI population as a whole."

-- Adjusting for other factors isn't as simple as it seems, either. For example, say for the sake of argument that there is discrimination against LGBTI indiviuals in school and when growing up and thinking about occupational possibilities. Then if a researcher comes along later, and does a statistical adjustment for level of education and occupation, that researcher is (in a statistical sense) wiping out any discrimination which occurred at that earlier stage.

-- There is an issue of "household specialization bias." In heterosexual household, it is still fairly common to find a situation in which the man has a longer-term and heavier-hour commitment to the (paid) labor force than does the woman. "In heterosexual households, men are indeed typically more engaged in market activities than are women. Therefore, the average partnered heterosexual man should be more involved in the labour market than the average partnered gay man, while the average partnered heterosexual woman should be less involved in this market than the average partnered lesbian.:" Thus, findings of a wage penalty for gay men and wage premium for lesbians are common:  "However, multivariate analyses of individual labour earnings with couples-based survey data do not provide results consistent with lower job satisfaction among both gay men and lesbians. These analyses, which amount to 18 studies (26 estimates for gay men and 30 estimates for lesbians) ... reveal an earnings penalty for partnered gay men but an earnings premium (or no effect) for partnered lesbians. ...[T]his pattern is observed irrespective of the country where, or the time when the data used in these studies were collected. More precisely, partnered gay men suffer an average penalty of 8% while partnered lesbians enjoy an average premium of 7%." Sorting out how to think about this household specialization bias and to adjust for it isn't an easy task.

Another broad approach to looking at discrimination is "experimental" studies. Broadly speaking, these fall into two categories. In "correspondence" studies, researchers send out a bunch of job applications that are meant to be essentially the same, except that some of them have a fairly clear identifier that the applicant is likely to be LGBTI (or in other studies, there will be information to reveal race/ethnicity or male/female). Valfort reports:
"[T]he 13 correspondence studies that have tested for hiring discrimination based on sexual orientation typically point to an unfair treatment of the gay male and lesbian applicants: on average, they are 1.8 times less likely to be called back by the recruiter than are their heterosexual counterparts. For gay men, the heterosexual-to-homosexual callback rates ratio varies from 1.1 (Sweden – Ahmed, Andersson and Hammarstedt (2013b) and the UK - Drydakis (2016)) to 3.7 (Cyprus – Drydakis (2014b)) with an average at 1.9. For lesbians, it varies from 0.9 (Belgium – Baert (2014)) to 4.6 (Cyprus – Drydakis (2014b)) with an average at 1.7. Consistent with attitudes toward gay men being more negative than attitudes toward lesbians, homosexual men face slightly stronger hiring discrimination than do homosexual women."
Such studies offer compelling evidence that discrimination exists, but by the nature of such studies, they can only look at the non-face-to-face part of the job market. As Valfort writes:
"Moreover, this weakness implies that discrimination in the labour market is measured at only one point of an individual’s career, i.e. his/her access to a job interview. It says nothing however about his/her likelihood of being hired, or paid equally and promoted once hired. Nevertheless, audit studies indicate that, conditional on being interviewed, individuals from the minority (i.e. the group that typically receives the lowest rate of invitation to a job interview) are also less likely to be hired (e.g. C├ędiey and Foroni (2008)). These findings suggest that correspondence studies underestimate hiring discrimination."
The other experimental approach are "audit" studies, which involve people who have been trained to play a role of a person with a certain background who is applying for job, or for a mortgage, or trying to rent an apartment, and so on. Audit studies have been a powerful way of revealing racial discrimination in a US context, but they have difficulties. Because they involve real people doing real-life applications and waiting for answers, such studies are often time-consuming and expensive. But they are workable in certain contexts. Valfont gives many examples, but here are two of them:
Various field experiments have shown that sexual minorities face discrimination in their everyday life. For instance, Jones (1996) sends letters from either a same-sex or opposite-sex couple, requesting weekend reservations for a one-bed room in hotels and bed-and-breakfast establishments in the US. His results show that opposite-sex couples are granted 20% more reservations than both male and female same-sex couples. Similarly, Walters and Curran (1996) conduct an audit study where same-sex and opposite-sex couples enter retail stores in the US while an observer measures the time it takes for the staff to welcome them. They find this time to be significantly less for heterosexual than for homosexual couples who often were not assisted and who were more likely to be repudiated.
Discrimination can manifest itself in many ways: in social settings, education, health, family life, occupational pressures, job interviews, promotions and wage raises, and more. Understanding where its manifestations are more powerful can be an important step in thinking about how best to address it. 

I do wonder if changes in the legal status of LGBTI individuals may offer a handle on looking at different types of discrimination. For example, the number of gay marriages reveals something about the number of such marriages that would have been blocked earlier. Similarly, changes in occupations and pay patterns that happen after legal changes will reveal something about earlier patterns of discrimination, too.

Those interested in this subject might also want to check the post on "Some Patterns for Same-Sex Households" (February 19, 2018).

Saturday, April 21, 2018

Most Global Violent Deaths are Murder, Not War

I did not know that by far most violent deaths in the world are a result of murder, not war. The pattern is reported in Global Violent Deaths 2017: Time to Decide, by Claire Mc Evoy and Gergely Hideg. It's a report from Small Arms Survey, which is a research center at the Graduate Institute of International and Development Studies in Geneva, Switzerland. The report notes:
'"In 2016, interpersonal and collective violence claimed the lives of 560,000 people around the world. About 385,000 of them were the victims of intentional homicides, 99,000 were casualties of war, and the rest died in unintentional homicides or due to legal interventions. ...

"In 2016, firearms were used to kill about 210,000 people—38 per cent of all victims of lethal violence. About 15 per cent of these individuals died in direct conflict, while the majority fell victim to intentional homicide (81 per cent). ...

"In terms of homicides alone, states could save up to 825,000 lives between 2017 and 2030 if they gradually stepped up their approach to crime control and prevention to reach the violence reduction levels of the top performers in their respective world regions. In so doing, states in the subregion of Latin America and the Caribbean would benefit most, saving as many as 489,000 lives in total by 2030, followed by states in South-eastern Asia (86,000 lives) and Eastern Africa (56,000 lives) ..."
This report doesn't present country-by-country data on homicide rates. But the World Bank DataBank website tabulates country-by-country-rates on Intentional Homicide using data from the UN Office on Drugs and Crime's International Homicide Statistics database. In 2015, for example, the global intentional  homicide rate in this dataset was 5.3 per 100,000, while the US intentional homicide rate was 4.9 per 100,000.

For the situation of deaths in armed conflict, the SAS report shows that in recent years by far the largest share are represented by events in Syria, Iraq, and Afghanistan.

Homage: I ran into the SAS report because it was a lead story in the April 5 issue of the Economist magazine.

Friday, April 20, 2018

The Clean Cooking Problem: 2.3 Million Deaths Annually

"Today around 2.8 billion people – 38% of the global population and almost 50% of the population in developing countries – lack access to clean cooking. Most of them cook their daily meals using solid biomass in traditional stoves. In 25 countries, mostly in sub-Saharan Africa, more than 90% of households rely on wood, charcoal and waste for cooking. Collecting this fuel requires hundreds of billions of hours each year, disproportionately affecting women and children. Burning it creates
noxious fumes linked to 2.8 million premature deaths annually."

Thus reports "Chapter 3: Access to Clean Cooking,:" from Energy Access Outlook 2017: From Poverty to Prosperity, published in October 2017 by the International Energy Agency and the OECD.  The report continues:
"Progress on access to clean cooking has been gathering momentum in parts of Asia, backed by targeted policies focussed mainly on the use of LPG [liquified petroleum gas]. In China, the share of he population relying on solid fuels for cooking declined from over one-half in 2000 to one-third in 2015. In Indonesia, the share of the population using solid biomass and kerosene fell from 88% in 2000 to 32% in 2015. Despite these efforts, the number of people without clean cooking access has stayed flat since 2000, with population growth outstripping progress in many countries. In sub-Saharan Africa, there were 240 million more people relying on biomass for cooking in 2015 compared to 2000."

The report estimates that an investment of an additional $42 billion, above and beyond what is already happening, would be needed by 2030 to provide access to clean cooking for the 2.3 billion people who otherwise will not have access to clean cooking by that time. At one level, $42 billion is a lot of money: at another level, it's almost an absurdly cheap price to pay for the potential benefits.

Other chapters of the report have a useful overview of the progress toward all people having access to electricity. The big success story in the last 20 years or so is India. The lagging region is sub-Saharan Africa.

Thursday, April 19, 2018

A Classic Question: Does Government Empower or Stifle?

If you look at the high-income countries of the world--the US and Canada, much of Europe, Japan, Australia--all of them have government which spend amounts equal to one-third or more of GDP (combining both central and regional or local government). Apparently, high-income countries have relatively large government. Conversely, when you look at some of the world's most discouraging and dismal economic situations--say, Zimbabwe, North Korea, or Venezuela--it seems clear that the decisions of the government have played a large role in their travails. So arises a classic question: In what situations and with what rules does government empower its people and economy, and under what situations and with what rules does the government stifle them?

Like all classic questions, only those who haven't thought about it much will offer you an easy answer. Peter Boettke instead offers a  thoughtful exploration of many of the complexities and tradeoffs in his Presidential Address to the Southern Economic Association, "Economics and Public Administration," available in the April 2018 issue of the Southern Economic Journal (84:4, pp. 938-959).

Boettke offers a reminder that a number of prominent economists have pondered the issue of how states can empower or become predatory. For example, here are reminders from a couple of Nobel laureates:
Douglass North [Nobel '93] in Structure and Change in Economic History (1981) ... said that the state, with its ability to define and enforce property rights, can provide the greatest impetus for economic development and human betterment, but can also be the biggest threat to development and betterment through its predatory capacity. James Buchanan [Nobel '86] in Limits of Liberty (1975) stated the dilemma that must be confronted as follows—the constitutional contract must be designed in such a way that empowers the protective state (law and order) and the productive state (public goods) while constraining the predatory state (redistribution and rent-seeking). If the constitutional contract cannot be so constructed, then economic development and human betterment will not follow.
Although Boettke doesn't make the point here, the authors of the US Constitution struggled as well with the idea that government was an absolute necessity, but finding a way for government to be controlled was also a necessity. As James Madison wrote in Federalist #51:
"If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions."
This challenge of building a government that is strong, but not too strong, and strong only in certain ways while remaining weak in others, is not just a matter of writing up a constitution or design of a government. Plenty of governments act oppressively at times, or even a majority of the time, while having the form of elections and constitutional rights. The heart of the issue, Boettke argues, runs deeper than the formal structures of government, and down to the bedrock of the social institutions on which these forms of government are based. He writes:
"The observational genius of the 20th century Yogi Berra once captured the essence of this argument while watching a rookie ball player attempting to imitate the batting stance of Frank Robinson, the recent triple crown winner, when he advised, “if you can t imitate him, don t copy him.” ... The countries plagued by poverty cannot simply copy the governmental institutions of those that are not so plagued by poverty. They are constrained at any point in time by the existing institutional possibilities frontier, and thus must shift the institutional possibilities frontier as technology and human capital adjust to find the constitutional contract that can effectively empower the protective and productive state, while effectively constraining the predatory state."
Economists have often ducked or assumed this question of institution building. For example, most of the arguments that economists make about how markets function, or about how self-interested sellers and buyers may act as if ruled by an "invisible hand" to promote social welfare, are based on the assumption that a decently functioning government is hovering in the background. Boettke refers to an essay by Lionel Robbins and writes:
"Adam Smith and his contemporaries never argued that the individual pursuit of self-interest will always and everywhere result in the public interest, but  rather that the individual pursuit of self-interest within a specific set of institutional arrangements— namely well-defined and enforced private property rights—would produce such a result. Though as Robbins (ibid, p. 12) writes, “You cannot understand their attitude to any important concrete measure of policy unless you understand their belief with regard to the nature and effects of the system of spontaneous-cooperation.” The system of spontaneous-cooperation, or economic freedom, does not come about absent a “firm framework of law and order.” The “invisible  hand,” according to the classical economists, “is not the hand of some god or some natural agency independent of human effort; it is the hand of the lawgiver, the hand which withdraws from the sphere of the pursuit of self-interest those possibilities which do not harmonize with the public good” (Robbins 1965, p. 56).
"In other words, the market mechanism works as described in the theory of the “invisible hand” because an institutional configuration was provided for by a prior Non-Market Decision Making process. The correct institutions of governance must be in place for economic life to take place (within those institutions)."
When we move outside the realm of market transactions set against a backdrop of decently functioning government, social scientists find it harder to draw conclusions. "But what happens when we move outside the realm of the market economy? Public administration begins where the realm of rational economic calculation ends."

On one side, decisions made by public administration areunlikely to involve competitive producers, choices made by consumers between these producers, and a price mechanism. Nonetheless, public decisions still have tradeoffs, and still face questions of whether the marginal benefits of a certain action (or a change in spending) will outweigh the marginal costs. 

Moreover, we know from sad experience that public administration is subject to special interest pressures and being captured by those who are supposedly the subjects of the regulation. We know that a number of politicians and government workers (no need to quibble over the exact proportion) put a high priority on pursuing their own personal career self-interest. We know that when a private sector firm fails to provide what customers want, it goes broke and is replaced by other firms, but that when a part of government fails badly in providing what citizens want, the part of government does not disappear and instead typically claims that failure is a reason for giving it more resources to do the job. 

One approach to all these issues is to take what Boettke calls "the God s-eye-view assumption," in which the all-seeing, all-wise, and all-beneficent economist can see the path that must be taken. But if you instead are skeptical of economists (and others involved in politics), then Boettke points out that some questions about public administration must be faced.
"Those who favor public administration over the market mechanism must at least acknowledge the question raised earlier—how is government going to accomplish the task of economic management?What alternative mechanisms in public administration will serve the role that property, prices and profit and loss serve within the market setting?
"Let us consider the following example—a vacant piece of land in a down-town area of a growing city. The plot of land could be used as a garage, which would complement efforts to develop commercial life downtown. Or, it could be used to build a park, encouraging city residents to enjoy green space and outdoor activities. Alternatively, it could be used to locate a school which would help stimulate investment in human capital. All three potential uses are worthy endeavors. If this was to be determined by the market, then the problem would be solved via the price mechanism and the willingness and the ability to pay. But if led by government, the use of this land will need to be determined by public deliberation and voting. We cannot just assume that the “right”
decision on the use of this public space will bemade in the public arena. In fact, due to a variety of problems associated with preference aggregation mechanisms, we might have serious doubts as to any claim of “efficiency” in such deliberations. ...

"More recently, Richard Wagner, in Politics as a Peculiar Business (2016, p. 146ff), uses the example of a marina surrounded by shops, hotels, and restaurants—think of Tampa, Florida. The marina, shops, hotels, and restaurants operate on market principles, but the maintenance of the roads and waterways are objects of collective decision making. Road maintenance and waterway dredging, for example, will be provided by government bureaus, but how well those decisions are made will have an impact on the operation of the commercial enterprises, and the viability of the commercial enterprises will no doubt have influence on the urgency and care of these bureaucratic efforts."
Boettke argues that "the idea of a unitary state populated by omniscient and benevolent expert bureaucrats" should be rejected. He also argues that economists (and other social scientists) can be prone to casting themselves in the role of these omniscient and benevolent experts. He quotes from near the beginning of James Buchanan's  1986 Nobel lecture:  “Economists should cease proffering policy advice as if they were employed by a benevolent despot, and they should look to the structure within which political decisions are made.” 

We live in a complex world, and there absolutely is a need for expert advice in many areas. But there is also crying need for experts to go beyond arguing with each other, or insulting the opposition, or attempting to get a grip on the levers of political power. There is a need for economists and other experts to participate in and to respect a broader process of institution-building and participating in the social consensus. (In a small way, this "Conversable Economist" blog is an attempt to broaden the social conversation in a way that includes expert insight without overly deferring to it. )

Boettke cites some comments from yet another Nobel laureate along these lines: 
"Elinor Ostrom concludes her 2009 Nobel lecture by summarizing the main lessons learned in her intellectual journey, and they are that we must “move away from the presumption that the government must” solve our problems, that “humans have a more complex motivational structure and more capability to solve social dilemmas” than traditional theory suggests, and that “a core goal of public policy should be to facilitate the development of institutions that bring out the best in humans ... ”  .  Self-governing democratic societies are fragile entities that require continual reaffirmation by fallible but capable human beings. “We need to ask,” Elinor Ostrom continued, “how diverse polycentric institutions help or hinder the innovativeness, learning, adapting, trustworthiness, levels of cooperation of participants, and the achievement of a more effective, equitable and sustainable outcomes at multiple scales." 

Wednesday, April 18, 2018

Global Debt Hits All-Time High

"At $164 trillion—equivalent to 225 percent of global GDP—global debt continues to hit new record highs almost a decade after the collapse of Lehman Brothers. Compared with the previous peak in 2009, the world is now 12 percent of GDP deeper in debt, reflecting a pickup in both public and nonfinancial private sector debt after a short hiatus (Figure 1.1.1). All income groups have experienced increases in total debt but, by far, emerging market economies are in the lead. Only three countries (China, Japan, United States) account for more than half of global debt (Table 1.1.1)—significantly greater than their share of global output."

Thus notes the IMF in the April 2018 issue of Fiscal Monitor (Chapter 1: "Saving for a Rainy Day," Box 1.1, as usual, citations omitted from the quotation above for readability). Here's the figure and the table mentioned in the quotation.
The figure shows public debt in blue and private debt in red. In some ways, the recent increase doesn't stand out dramatically on the figure. But remember that the vertical axis is being measured as a percentage of the world GDP of about $87 trillion, so the rising percentage represents a considerable sum. 

Here's an edited version of the table, where I cut a column for 2015. The underlying source is the same as the figure above. As noted above, the US, Japan, and China together account for half of  total global debt. 

The rise in debt in China is clearly playing a substantial role here. Explicit central government debt in China is not especially high. But corporate debt in China has risen quickly: as the IMF notes of the period since 2009, "China alone explains almost three-quarters of the increase in global private debt."

In addition, China faces a surge of off-budget borrowing from financing vehicles used by local governments, which often feel themselves under pressure to boost their local economic growth. The IMF explains: 
 "The official debt concept [in China] points to a stable debt profile over the medium term at about 40 percent of GDP. However, a broader concept that includes borrowing by local governments and their financing vehicles (LGFVs) shows debt rising to more than 90 percent of GDP by 2023 primarily driven by rising off-budget borrowing. Rating agencies lowered China’s sovereign credit ratings in 2017, citing concerns with a prolonged period of rapid credit growth and large off-budget spending by LGFVs.
"The Chinese authorities are aware of the fiscal risks implied by rapidly rising off-budget borrowing and undertook reforms to constrain these risks. In 2014, the government recognized as government obligations two-thirds of legacy debt incurred by LGFVs (22 percent of GDP). In 2015, the budget law was revised to officially allow provincial governments to borrow only in the bond market, subject to an annual threshold. Since then, the government has reiterated the ban on off-budget borrowing by local governments, while more strictly regulating the role of the government in public-private partnerships and holding local officials accountable for improper borrowing. Given these measures, the authorities do not consider the LGFV off-budget borrowing as a government obligation under applicable laws.
"There is some uncertainty regarding the degree to which these measures will effectively curb off-budget borrowing. "
An underlying theme of the IMF report is that when an economy is in relatively good times, like the US economy today, it should be figuring out ways to put its borrowing on a downward trend for the next few years. A similar lesson applies to China, where there appears to be some danger that the high levels of borrowing from firms and from local governments are creating future risks.

One old lesson re-learned in the global financial crisis is that high levels of debt can be dangerous. If stock prices rise and then fall, investors will be unhappy that they lost their gains--but for many of them, the gains were only on paper, anyway. But debt is different. If circumstances arises where debts are less likely to be repaid, then financial institutions may well find it hard to raise capital, and will be pressured to cut back on lending. If borrowing was helping to hold asset prices high (including housing, land, or stocks), then a decline in borrowing can cause those asset prices to drop. Lower asset prices make it harder to repay borrowed money, tightening the financial crunch, and slowing an economy further. 

When global debt as a share of GDP is hitting an all-time high, it's worth paying attention to the risks involved.

Tuesday, April 17, 2018

Some Economics for Tax Filing Day

U.S. tax returns and taxes owed for 2017 are due today, April 17. To commemorate, I offer some connections to five posts about federal income taxes from the last few years. Click on the links if you'd like additional discussion and sources for of any of these topics.

1) Should Individual Income Tax Returns be Public Information? (March 30, 2015)
"My guess is that if you asked Americans if their income taxes should be public information, the answers would mostly run the spectrum from "absolutely not" to "hell, no." But the idea that tax returns should be confidential and not subject to disclosure was not a specific part of US law until 1976. At earlier periods of US history, tax returns were sometimes published in newspapers or posted in public places. Today, Sweden, Finland, Iceland and Norway have at least some disclosure of tax returns--and since 2001 in Norway, you can obtain information on income and taxes paid through public records available online."

2) How much does the federal tax code reduce income inequality, in comparison with  social insurance spending and means-tested transfers? 

"The Distribution and Redistribution of US Income" (March 20, 2018) is based on a report from the Congressional Budget Office, "The Distribution of Household Income, 2014" (March 2018).

From the post: "The vertical axis of the figure is a Gini coefficient, which is a common way of summarizing the extent of inequality in a single number. A coefficient of 1 would mean that one person owned everything. A coefficient of zero would mean complete equality of incomes.

"In this figure, the top line shows the Gini coefficient based on market income, rising over time.

"The green line shows the Gini coefficient when social insurance benefits are included: Social Security, the value of Medicare benefits, unemployment insurance, and worker's compensation. Inequality is lower with such benefits taken into account, but still rising. It's worth remembering that almost all of this change is due to Social Security and Medicare, which is to say that it is a reduction in inequality because of benefits aimed at the elderly.

"The dashed line then adds a reduction in inequality due to means-tested transfers. As the report notes, the largest of these programs are "Medicaid and the Children’s Health Insurance Program (measured as the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); and Supplemental Security Income." What many people think of as "welfare," which used to be called Aid to Families with Dependent Children (AFDC) but for some years now has been called Temporary Assistance to Needy Families (TANF), is included here, but it's smaller than the programs just named.

"Finally, the bottom purple line also includes the reduction in inequality due to federal taxes, which here includes not just income taxes, but also payroll taxes, corporate taxes, and excise taxes."

3) "How Raising the Top Tax Rate Won't Much Alter Inequality" (October 23, 2015)

"Would a significant increase in the top income tax rate substantially alter income inequality?" William G. Gale, Melissa S. Kearney, and Peter R. Orszag ask the question in a very short paper of this title published by the Economic Studies Group at the Brookings Institution. Their perhaps surprising answer is "no."

The Gale, Kearney, Orszag paper is really just a set of illustrative calculations, based on the well-respected microsimulation model of the tax code used by the Tax Policy Center. Here's one of the calculations. Say that we raised the top income tax bracket (that is, the statutory income tax rate paid on a marginal dollar of income earned by those at the highest levels of income) from the current level of 39.6% up to 50%. Such a tax increase also looks substantial when expressed in absoluted dollars. By their calculations, "A larger hike in the top income tax rate to 50 percent would result, not surprisingly, in larger tax increases for the highest income households: an additional $6,464, on average, for households in the 95-99th percentiles of income and an additional $110,968, on average, for households in the top 1 percent. Households in the top 0.1 percent would experience an average income tax increase of $568,617."

In political terms, at least, this would be a very large boost. How much would it affect inequality of incomes? To answer this question, we need a shorthand way to measure inequality, and a standard tool for this purpose is the Gini coefficient. This measure runs from 0 in an economy where all incomes are equal to 1 in an economy where one person receives all income (a more detailed explanation is available here). For some context, the US distribution of income based on pre-tax income is .610. After current tax rates are applied, the after-tax distribution of income is .575.

If the top tax bracket rose to 50%, then according to the first round of Gale, Kearney, Orszag calculations, the Gini coefficient for after-tax income barely fall, dropping to .571. For comparison, the Gini coefficient for inequality of earnings back in 1979, before inequality had started rising, was .435. ... 

Raising the top income tax rate to 50% brings in less than $100 billion per year. Total federal spending in 2015 seems likely to run around $3.8 trillion. So it would be fair to say that raising the top income tax rate to 50% might increase total federal revenues by about 2%.

4) The top marginal income tax rates used to be a lot higher, but what share of taxpayers actually faced those high rates,, and much revenue did those higher rates actually collect?

Compare "Top Marginal Tax Rates: 1958 vs. 2009" (March 16, 2012), which is based on a short report by Daniel Baneman and Jim Nunns,"Income Tax Paid at Each Tax Rate, 1958-2009," published by the Tax Policy Center. The top statutory tax rate in 2009 was 35%; back in 1958, it was about 90%. What share of taxpayer returns paid these high rates? Across this time period, roughly 20% of all tax returns owed no tax, and so faced a marginal tax rate of zero percent. Back in 1958, the most common marginal tax brackets faced by taxpayers were in the 16-28% category; since the mid-1980s, the most common marginal tax rate faced by taxpayers has been the 1-16% category. Clearly, a very small proportion of taxpayers actually faced the very highest marginal tax rates.

How much revenue was raised by the highest marginal tax rates? Although the highest marginal tax rates applied to a tiny share of taxpayers, marginal tax rates above 39.7% collected more than 10% of income tax revenue back in the late 1950s. It's interesting to note that the share of income tax revenue collected by those in the top brackets for 2009--that is, the 29-35% category, is larger than the rate collected by all marginal tax brackets above 29% back in the 1960s.

5) Did you know "How Milton Friedman Helped to Invent Tax Withholding" (April 12, 2014)?

The great economist Milton Friedman--known for his pro-market, limited government views--helped to invent government withholding of income tax. It happened early in his career, when he was working for the U.S. government during World War II, and the top priority was to raise government revenues to support the war effort. Of course, the IRS opposed the idea at the time as impractical.

Monday, April 16, 2018

The Share of Itemizers and the Politics of Tax Reform

Those who fill out a US tax return always face a choice. On one hand, there is a "standard deduction," which is the amount you deduce from your income before calculating your taxes owed on the rest. On the other hand, there are a group of individual tax deductions: for mortgage interest, state and local taxes, high medical expenses, charitable contributions, and others. If the sum of all these deductions is larger than the standard deduction, then a taxpayer will "itemize" deductions--that is, filling out additional tax forms that list all the deductions individually. Conversely, if the standard deduction is larger than the sum of all the individual deductions is not larger than the list of itemized deductions, then the taxpayer just uses the standard deduction, and doesn't go through the time and bother of itemizing.

In the last 20 years or so, typically about 30-35% of federal tax returns found it worthwhile to itemize deductions.
But the Tax Cuts and Jobs Act passed into law and signed by President Trump in December 2017 will change this pattern substantially. The standard deduction increases substantially, while limits or caps are imposed on some prominent deductions. As a result, the number of taxpayers who will find it worthwhile to itemize will drop substantially.

Simulations from the Tax Policy Center, for example, suggest that the total number of itemizers will fall by almost 60%, from 46 million to 19 million -- which means that in next year's taxes, maybe only about 11% of all returns will find it worthwhile to itemize.

Set aside all the arguments over pros and cons and distributional effects of the changes in the standard deduction and the individual deductions, and focus on the political issue. It seems to me that this dramatic fall in the number of taxpayers, especially if it is sustained for a few years, will realign the political arguments over future tax reform. If one-third or so of taxpayers are itemizing--and those who itemize are typically those with high incomes and high deductions who make a lot of noise--then reducing deductions will be politically tough. But if only one-ninth of taxpayers are itemizing, while eight-ninths are just taking the standard deduction, then future reductions in the value of tax deductions may be easier to carry out. It will be interesting to see if the political dynamics of tax reform shift along these lines in the next few years.

When Britain Repealed Its Income Tax in 1816

Great Britain first had an income tax in 1799, but then abolished it in 1816. In honor of US federal tax returns being due tomorrow, April 17, here's a quick synopsis of the story.

Great Britain was in an on-and-off war with France for much of the 1790s. The British government borrowed heavily and was short of funds. When Napoleon came to power in 1799, the government under Prime Minister William Pitt introduced a temporary income tax. Here's a description from the website of the British National Archives:
‘Certain duties upon income’ as outlined in the Act of 1799 were to be the (temporary) solution. It was a tax to beat Napoleon. Income tax was to be applied in Great Britain (but not Ireland) at a rate of 10% on the total income of the taxpayer from all sources above £60, with reductions on income up to £200. It was to be paid in six equal instalments from June 1799, with an expected return of £10 million in its first year. It actually realised less than £6 million, but the money was vital and a precedent had been set.
In 1802 Pitt resigned as Prime Minister over the question of the emancipation of Irish catholics, and was replaced by Henry Addington. A short-lived peace treaty with Napoleon allowed Addington to repeal income tax. However, renewed fighting led to Addington’s 1803 Act which set the pattern for income tax today. ...

Addington’s Act for a ‘contribution of the profits arising from property, professions, trades and offices’ (the words ‘income tax’ were deliberately avoided) introduced two significant changes:
  • Taxation at source - the Bank of England deducting income tax when paying interest to holders of gilts, for example
  • The division of income taxes into five ‘Schedules’ - A (income from land and buildings), B (farming profits), C (public annuities), D (self-employment and other items not covered by A, B, C or E) and E (salaries, annuities and pensions).
 Although Addington’s rate of tax was half that of Pitt’s, the changes ensured that revenue to the Exchequer rose by half and the number of taxpayers doubled. In 1806 the rate returned to the original 10%.
Pitt in opposition had argued against Addington’s innovations: he adopted them almost unchanged, however, on his return to office in 1805. Income tax changed little under various Chancellors, contributing to the war effort up to the Battle of Waterloo in 1815.
Perhaps unsurprisingly, Britain's government was not enthusiastic about repealing the income tax even after the defeat of Napoleon. But there was an uprising of taxpayers. The website of the UK Parliament described it this way:
"The centrepiece of the campaign was a petition from the City of London Corporation. In a piece of parliamentary theatre, the Sheriffs of London exercised their privilege to present the petition from the City of London Corporation in person. They entered the Commons chamber wearing their official robes holding the petition.
"The petition reflected the broad nature of the opposition to renewing the tax. Radicals had long complained that ordinary Britons (represented by John Bull in caricatures) had borne the brunt of wartime taxation. Radicals argued that the taxes were used to fund 'Old Corruption', the parasitic network of state officials who exploited an unrepresentative political system for their own interests.
"However, the petitions in 1816 came from very different groups, including farmers, businessmen and landowners, who were difficult for the government to dismiss. Petitioners, such as Durham farmers, claimed they had patriotically paid the tax during wartime with 'patience and cheerfulness', distancing themselves from radical critics of the government.
"In barely six weeks, 379 petitions against renewing the tax were sent to the House of Commons. MPs took the opportunity when presenting these petitions, to highlight the unpopularity of the tax with their constituents and the wider public. ... Ministers were accused of breaking the promise made in 1799 when the tax was introduced as a temporary, wartime measure and not as a permanent tax. The depressed state of industry and agriculture was blamed on heavy taxation.
"The tax was also presented as a foreign and un-British measure that allowed the state to snoop into people's finances. As the City of London petition complained, it was an 'odious, arbitrary, and detestable inquisition into the most private concerns and circumstances of individuals'."
Also unsurprisingly, the repeal of the income tax led the British government to raise other taxes instead. The BBC writes: Forced to make up the shortfall in revenue, the Government increased indirect taxes, many of which, for example taxes on tea, tobacco, sugar and beer, were paid by the poor. Between 1811 and 1815 direct taxes - land tax, income tax, all assessed taxes - made up 29% of all government revenue. Between 1831 and 1835 it was just 10%."

There's a story that when Britain repealed its income tax in 1816, Parliament ordered that the records of tax be destroyed, so posterity would never learn about it and be tempted to try again. The BBC reports:
"Income tax records were then supposedly incinerated in the Old Palace Yard at Westminster. Whether this bonfire really took place we can't say. Several historians who have studied the period refer to the event as a story or legend that may have been true. Perhaps the most convincing evidence are reports that, in 1842, when Peel re-introduced income tax, albeit in a less contentious form, the records were no longer available. Another story is that those burning the records were unaware of the fact that duplicates had been sent for safe-keeping to the King's Remembrancer. They were then put into sacks and eventually surfaced in the Public Records Office."